NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Financial Statements For the Years Ended December 31, 2016 and 2015
KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto ON M5H 2S5 Canada Tel 416-777-8500 Fax 416-777-8818 INDEPENDENT AUDITORS' REPORT To the Unitholders of NorthWest Healthcare Properties Real Estate Investment Trust We have audited the accompanying consolidated financial statements of NorthWest Healthcare Properties Real Estate Investment Trust, which comprise the consolidated balance sheet as at December 31, 2016, the consolidated statements of income and comprehensive income, the consolidated statements of changes in unitholders' equity and consolidated statements of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.
Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of NorthWest Healthcare Properties Real Estate Investment Trust as at December 31, 2016 and December 31, 2015 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 2, 2017 Toronto, Canada
NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Balance Sheet (in thousands of Canadian dollars) As at December 31, 2016 December 31, 2015 Assets Investment properties (note 9) $ 3,040,354 $ 2,491,835 Investment in associates (note 10) 95,351 - Intangible assets (note 11) 103,196 46,757 Goodwill (note 4) 41,671 41,671 Due from related party (note 12) 315 1,736 Financial instruments (note 20) 449 8,506 Accounts receivable 6,485 3,919 Income tax receivable 836 1,092 Other assets (note 13) 19,625 10,903 Cash and restricted cash (note 14) 20,251 15,396 Assets held for sale (note 15) - 78,194 Total assets $ 3,328,533 $ 2,700,009 Liabilities Mortgages and loans payable (note 16) $ 1,365,676 $ 1,252,993 Deferred consideration (note 17) 13,119 34,073 Convertible debentures (note 18) 331,834 170,094 Deferred revenue 573 - Deferred tax liability (note 19) 140,150 87,633 Financial instruments (note 20) 15,077 18,425 Income tax payable 14,230 7,373 Accounts payable and accrued liabilities 44,740 45,020 Distributions payable 4,629 3,513 Liabilities related to assets held for sale (note 15) - 52,674 1,930,028 1,671,798 Deferred unit plan liability (note 21) 14,935 15,597 Class B exchangeable units (note 22) 193,780 169,653 Total liabilities $ 2,138,743 $ 1,857,048 Unitholders' Equity Unitholders' equity (note 23) 704,285 515,478 Non-controlling interest 485,505 327,483 Subsequent events (note 33) Total liabilities and unitholders' equity $ 3,328,533 $ 2,700,009 The consolidated financial statements were approved by the Board on March 2, 2017 and signed on its behalf by: Colin Loudon Paul Dalla Lana Trustee Trustee The accompanying notes are an integral part of these consolidated financial statements - 2 -
NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Statements of Income and Comprehensive Income (in thousands of Canadian dollars) For the Year Ended December 31, 2016 2015 Net Property Operating Income Revenue from investment properties $ 277,346 $ 198,960 Property operating costs 74,749 52,999 202,597 145,961 Other Income Interest 2,852 912 Management fees (note 11) 2,102 - Share of profit of associates (note 10) 8,679 2,153 13,633 3,065 Expenses Mortgage and loan interest expense 75,851 64,297 General and administrative expenses (note 26) 19,772 25,121 Transaction costs 4,106 10,310 Foreign exchange (income) loss 1,465 2,192 101,194 101,920 Income before other finance costs, fair value adjustments, and net loss on disposal of investment property, and net gain on business combination 115,036 47,106 Finance Costs Amortization of financing costs (4,768) (6,907) Amortization of mark-to-market adjustment 5,964 6,219 Class B exchangeable unit distributions (note 22) (15,199) (16,986) Fair value adjustment of Class B exchangeable units (note 22) (24,127) 13,201 Accretion of financial liabilities (notes 16 and 17) (10,053) (13,705) Fair value adjustment of convertible debentures (note 18) (6,490) (3,930) Convertible debenture issuance costs (7,064) (3,134) Fair value gain (loss) on financial instrument (note 20) (1,945) (404) Fair value adjustment of investment properties (note 9) 136,366 170,301 Net loss on disposal of investment properties (note 8) (2,807) (1,352) Fair value adjustment of deferred unit plan liability (1,451) 514 Gain on business combination (notes 5 and 6) 53 69,023 Income before taxes 183,515 259,946 Income tax expense (note 19) 54,384 42,521 Net income $ 129,131 $ 217,425 Net income attributable to: Unitholders $ 56,963 $ 116,854 Non-controlling interest 72,168 100,571 $ 129,131 $ 217,425 The accompanying notes are an integral part of these consolidated financial statements - 3 -
NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Statements of Income and Comprehensive Income (continued) (in thousands of Canadian dollars) For the Year Ended December 31, 2016 2015 Other comprehensive income (loss): Items that w ill be reclassified subsequently to income: Foreign currency translation adjustment $ 20,593 $ 892 Realised foreign exchange gains/(losses) on hedges 16,826 (1,207) Current taxation (expense)/credit (4,711) 337 Unrealised foreign exchange gains/(losses) on hedges (8,560) 1,418 Deferred taxation (expense)/credit 2,397 (397) Fair value gain (loss) on net investment hedges 2,168 (1,750) Deferred taxation (expense)/credit (607) 287 Current taxation (expense)/credit - 204 Other comprehensive income, net of tax 28,106 (216) Total comprehensive income for the period $ 157,237 $ 217,209 Total comprehensive income attributable to: Unitholders $ 88,244 $ 115,454 Non-controlling interest 68,993 101,755 $ 157,237 $ 217,209 The accompanying notes are an integral part of these consolidated financial statements - 3 -
NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Statements of Changes in Unitholders' Equity (in thousands of Canadian dollars) Unaudited 2 3 4 5 6 7 8 9 10 Unitholders' Equity Contributed Surplus Reduction on Reclassification to Liabilities Cumulative Distributions Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Unitholders' Equity Non- Controlling Interest Total Equity Balance, December 31, 2014 $ 153,989 $ 4,627 $ (115) $ (25,635) $ (1,992) $ (30,906) $ 99,968 $ - $ 99,968 Units issued through distribution reinvestment plan 3,394 - - - - - 3,394 2,561 5,955 Units issued on exercise of deferred units 1,028 - - - - - 1,028-1,028 Asset management fees paid in units 292 - - - - - 292-292 Issuance of units on merger 302,197 - - - - - 302,197-302,197 Unit redemption on merger (2,593) - - - - - (2,593) - (2,593) Cancellation of REIT units under normal course issuer bid (note 19) (6,648) - - - - - (6,648) - (6,648) Conversion of Class B exchangeable units 1,649 - - - - - 1,649-1,649 Capital contribution - 35,212 - - - - 35,212-35,212 Acquisition of control of subsidiary - - - - - - - 241,912 241,912 Distributions - - - (34,501) - - (34,501) (18,745) (53,246) Currency translation differences - - - - (1,106) - (1,106) 2,024 918 Other comprehensive (loss) - - - - (268) - (268) (840) (1,108) Net income (loss) for the period - - - - - 116,854 116,854 100,571 217,425 Balance, December 31, 2015 453,308 39,839 (115) (60,136) (3,366) 85,948 515,478 327,483 842,961 Public offering of units (note 23) 143,795 - - - - - 143,795 107,835 251,630 Units issued through distribution reinvestment plan 4,821 - - - - - 4,821 4,063 8,884 Units issued on exercise of deferred units (note 23) 2,953 - - - - - 2,953-2,953 Cancellation of REIT units under normal course issuer bid (note 23) (285) - - - - - (285) - (285) Distributions - - - (50,721) - - (50,721) (22,869) (73,590) Currency translation differences - - - - 29,433-29,433 (8,840) 20,593 Other comprehensive income - - - - 1,848-1,848 5,665 7,513 Net income for the period - - - - - 56,963 56,963 72,168 129,131 Balance, December 31, 2016 $ 604,592 $ 39,839 $ (115) $ (110,857) $ 27,915 $ 142,911 $ 704,285 $ 485,505 $ 1,189,790 The accompanying notes are an integral part of these consolidated financial statements - 4 -
NORTHWEST HEALTHCARE PROPERTIES REAL ESTATE INVESTMENT TRUST Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the Year Ended December 31, 2016 2015 Cash provided by (used in): Operating activities Net income before taxes $ 183,515 $ 259,946 Adjustment for: Amortization 750 275 Mortgage and loan interest 75,851 64,297 Mortgage and loans interest paid (70,697) (64,582) Finance costs Amortization of financing costs 4,768 6,907 Amortization of mark-to-market adjustment (5,964) (6,219) Class B exchangable unit distributions (note 22) 15,199 16,986 Fair value adjustment of Class B exchangable units (note 22) 24,128 (13,201) Accretion of financial liabilities (notes 16 and 17) 10,053 13,705 Fair value adjustment of convertible debentures (note 18) 6,490 3,930 Convertible debenture issuance costs 7,064 3,133 Share of profit of associate (note 10) (8,679) (2,153) Gain on business combination (note 5 and 6) (53) (69,023) Unrealized foreign exchange (gain)/loss (47) 2,405 Amortization of deferred revenue (1,128) (1,160) Fair value adjustment of investment properties (note 9) (136,366) (170,300) Fair value (gain)/loss on financial instruments (note 20) 3,237 825 Net loss on disposal of investment properties (note 8) 2,807 1,352 Fair value adjustment of deferred unit plan liability 1,451 (514) Unit based compensation expense 2,122 11,100 Redemption of units issued under deferred unit plan (108) (1,040) Income taxes paid (5,798) (5,109) Changes in non-cash working capital balances (note 24(i)) (6,515) (4,970) Cash provided by (used in) operating activities 102,080 46,590 Investing activities Acquisitions of investment properties (note 7) (325,439) (12,346) Additions to investment properties (note 9) (72,188) (81,001) Net proceeds on disposal of investment property (note 8) 79,193 20,175 Additions to investment in associate (note 10) (97,252) - Investment in subsidiary (note 6) (56,387) - Working capital acquired on internalization - 468 Cash acquired on acquisition of control 2 1,055 Cash acquired on combination transaction (note 3) - 3,217 Distributions from associates (note 10) 2,268 3,172 Additions to furnitures and fixtures (765) (230) Receipts (payments) from foreign exchange contracts 17,988 (541) Net decrease (increase) to restricted cash 402 1,650 Cash provided by (used in) investing activities (452,178) (64,381) Financing activities Mortgage and loan proceeds 382,151 151,516 Mortgage and loans discharged (note 16) (167,222) (139,137) Repayment of mortgages (18,834) (11,943) Repurchase of units under normal course issuer bid (note 23) (286) (6,648) Net advances (repayments) of loans payable (122,820) 21,159 Issuance of convertible debentures, net of issuance cost (note 18) 148,351 49,868 Proceeds from issue of units, net of issue costs (note 23) 251,684 - Financing fees paid (14,392) (7,884) Net (payments) advances from related parties (362) 32,694 Payment of defered consideration (30,627) - Distributions paid (44,785) (29,187) Class B exchangeable units distributions paid (note 22) (15,199) (29,097) Distributions paid to non-controlling interest (21,387) (17,445) Cash provided by (used in) financing activities 346,272 13,896 Net change in cash (3,826) (3,895) Effect of foreign currency translation 8,946 360 Net change in cash 5,120 (3,535) Cash, beginning of period 14,835 18,370 Cash, end of period $ 19,955 $ 14,835 Supplemental disclosure relating to non-cash financing and investing activities (note 24(ii)) The accompanying notes are an integral part of these consolidated financial statements - 5 -
NorthWest Healthcare Properties Real Estate Investment Trust (the "REIT"), is a Canadian open-end trust created pursuant to an amended and restated Declaration of Trust dated May 15, 2015. The registered office of the REIT is 284 King Street East, Suite 100, Toronto, Ontario M5A 1K4. On May 15, 2015, the REIT completed a plan of arrangement ("Plan of Arrangement"), whereby the REIT acquired, among other things, all of the assets of NorthWest International Healthcare Properties Real Estate Investment Trust ("NWI"). Under the Plan of Arrangement, unitholders of NWI received 0.208 of a REIT trust unit, for each NWI REIT unit held, on a tax deferred basis. All outstanding NWI deferred units were exchanged on the same basis for REIT deferred units. In addition, NWI's exchangeable units were converted into a new class of limited partnership units using the same exchange ratio of 0.208, which are redeemable, at the option of the holder, for REIT trust units. Upon closing, the former unitholders of NWI owned approximately 52% of the issued and outstanding units of the combined entity. As a result of this and other qualitative considerations, NWI has been identified as the accounting acquirer. Accordingly, these consolidated financial statements are a continuation of the historical financial statements of NWI, with one adjustment, which is to adjust retroactively NWI's trust units, Class B and Class D exchangeable units, deferred units, and warrants (legal capital) to reflect the legal capital of the REIT using an exchange ratio of 0.208. NWI, referenced hereafter as the REIT, include references to NWI prior to the completion of the Plan of Arrangement. The results of operations of the REIT have been consolidated from the date of the combination transaction, May 15, 2015. With the completion of the transaction, NWI's trust units and convertible debentures (note 18) were delisted from the TSX Venture Exchange at the close of business May 19, 2015. See note 5 for further details. Until January 28, 2015, affiliates of NorthWest Value Partners Inc. ("NWVP") served as NWI's asset manager, property manager and developer pursuant to certain management and partnership agreements that are filed with the Canadian securities regulatory authorities and available on SEDAR at www.sedar.com. On January 28, 2015, with an effective date of January 1, 2015, the REIT internalized its external management arrangements (the "Internalization Transaction"), terminating the asset management, property management and development functions of NWI previously carried on by affiliates of NWVP. The Internalization Transaction also resulted in the REIT acquiring from NWVP all of the rights and obligations relating to the management of Vital Healthcare Property Trust ("Vital Trust"). See Note 3. The REIT's consolidated financial statements for the year ended December 31, 2016, were authorized for issue by the Board of Trustees on March 2, 2017. 1. Statement of Compliance (a) Statement of compliance The REIT's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). (b) Basis of presentation and measurement The consolidated financial statements are prepared on a going concern basis and have been presented in thousands of Canadian dollars, except units and per unit amounts. The Canadian dollar is the REIT's functional currency. The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires the REIT's management to exercise judgment in applying the REIT's accounting policies. These consolidated financial statements have been prepared in thousands of Canadian dollars on a historical cost basis except for: (i) Investment properties, which are measured at fair value; and (ii) Financial assets and financial liabilities classified as at fair value through profit and loss ("FVTPL"), derivative financial instruments and the deferred unit plan ("DUP") liability, which are measured at fair value. - 7 -
1. Statement of Compliance (continued) (c) Critical accounting estimates The preparation of these consolidated financial statements requires the REIT to apply judgment when making estimates and assumptions that affect the reported amounts recognized in the consolidated financial statements. These estimates have a direct effect on the measurement of transactions and balances recognized in the consolidated financial statements. Actual results could differ from those estimates. (i) Intangible asset Intangible asset represents the REIT's rights and obligations under the contracts between Vital Healthcare Management Limited ("VHML"), a wholly-owned subsidiary of the REIT, and Vital Trust, and the contract between Generation Healthcare Management Pty Limited ("GHM"), a wholly-owned subsidiary of the REIT, and Generation Healthcare REIT ( GHC ). The Vital Trust intangible asset has been measured at its fair value as at the effective date of the Internalization Transaction, January 1, 2015. The GHC intangible had been recorded at its fair value as at the date the REIT acquired GHM (see note 6). When estimating the fair value of the intangible assets, the REIT made estimates and assumptions that have a significant effect on the reported value of the intangible asset. Estimates used in determining the fair value of the intangible asset include management fees, operating expenses, discount rates, capitalization rates, inflation rates, interest rates, taxation rates, foreign currency exchange rates and earnings multiples. See note 3 and note 6. The contracts that govern the fee streams paid by both Vital Trust and GHC do not expire and therefore, the contracts are deemed indefinite-life intangible assets (note 2(a)). (ii) Incentive and performance fee revenues At the end of the measurement period, revenues from incentive fees, earned by VHML, and performance fees, earned by GHM, are recorded on the accrual basis based on the estimated amount that would be due under the Vital Trust and GHC fee formula as established by the respective contract. The calculated incentive fee from Vital Trust includes management estimates of capitalization rates, foreign currency exchange rates, and the timing of completion of development activities. The GHC performance fee calculating requires management estimates of rate of return on the units and index, and foreign currency exchange rates. (iii) Investment properties Investment properties are re-measured to fair value at each reporting date, determined based either on internal valuation models incorporating available market evidence, or on valuations performed by thirdparty appraisers. When estimating the fair value of investment properties, the REIT makes estimates and assumptions that have a significant effect on the reported value of investment properties. Estimates used in determining the fair value of the investment properties include capitalization rates, discount rates, inflation rates, vacancy rates, net operating income and capital expenditures. (iv) Interests in associates If it is determined that objective evidence exists that indicate that the REIT's interest in its associates has been impaired, the investment must be written down to its estimated fair value. Estimates used in determining the fair value of the associates include discount rates, inflation rates, net operating income and cash flows. (v) Derivative financial instruments The measurement of the fair value of the REIT's derivative financial instruments is based on estimates and assumptions that affect the reported amount of the liabilities and the corresponding gain or loss on changes in fair value. Estimates and assumptions used in the valuation for the REIT's derivatives are described in note 20. - 8 -
1. Statement of Compliance (continued) (d) Critical judgments in applying accounting policies In the preparation of these consolidated financial statements the REIT has made judgments, aside from those that involve estimates, in the process of applying the accounting policies. These judgments can have an effect on the amounts recognized in the consolidated financial statements. (i) Leases The REIT makes judgments in determining whether leases in which the REIT is the lessor are operating or finance leases, and has determined that all of its leases are operating leases. The accounting treatment of leases as finance leases would have a significant effect on the measurement of transactions and balances in the consolidated financial statements. (ii) Investment Acquisitions When investments are acquired, the REIT is required to apply judgment as to whether or not the transaction should be accounted for as an asset acquisition or business combination. A transaction is considered to be a business combination if the acquired investment meets the definition of a business in accordance with IFRS 3, "Business Combinations" ("IFRS 3"), being an integrated set of activities and assets that are capable of being managed for the purpose of providing a return. Business Combinations are measured at fair value on the date of acquisition based on the aggregate of the consideration transferred. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the acquisition date and acquisition-related costs are recognized in the consolidated statement of income as incurred. When acquisition of an investment does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values at the acquisition date, and no goodwill is recognized. Acquisition related costs are capitalized to the investment at the time the acquisition is completed. All of the REIT's property acquisitions, with the exception of any interest in investment properties acquired as a result of the Internalization Transaction (note 3),Combination Transaction (note 5), and Acquisition of GHM (note 6) of have been accounted for as asset acquisitions. (iii) Consolidation Vital Trust The REIT accounts for its investment in Vital Trust as a subsidiary and consolidates the financial position and results of Vital Trust. The REIT s interest in Vital Trust, as at December 31, 2016, is 24.8%. The REIT assessed it has control over Vital Trust based on the definition of control and certain criteria provided for in IFRS 10-Consolidated Financial Statements. The REIT has assessed it has control over Vital Trust based on the following key observations: i) the REIT controls the external manager of Vital Trust through the 100% indirect ownership of VHML. The ownership of the VHML results in the REIT directing all activities of Vital Trust; ii) the REIT has the right to appoint a majority of directors of the board of Vital Healthcare Management Limited, which acts as the board of directors of Vital Trust; and iii) the 75.2% non-controlling interest of Vital Trust is widely held with no known investor holding more than a 5% interest in Vital Trust, other than the REIT. (iv) Income Taxes With the exception of subsidiaries that are subject to income taxes, deferred income taxes are not recognized in the consolidated financial statements on the basis that the REIT can deduct distributions paid such that its liability for income taxes is substantially reduced or eliminated for the year. In applying this accounting policy, the REIT has made the judgment that the REIT intends to continue to distribute its taxable income and continue to qualify as a real estate investment trust for the foreseeable future; however, should it no longer qualify it would not be able to flow through its taxable income to unitholders and the REIT would be subject to Canadian taxation on its non-portfolio earnings. - 9 -
2. Summary of Significant Accounting Policies (continued) (a) Goodwill and intangible assets The carrying values of identifiable indefinite-life intangible assets and goodwill are tested for impairment annually and whenever there is an indication that the intangible asset may be impaired. A cash generating unit ("CGU") is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill and indefinite-life intangible assets are allocated to CGUs for the purpose of impairment testing based on the level at which management monitors them, which is not higher than an operating segment. The allocation is made to those CGUs that are expected to benefit from the business combination in which the goodwill arose. As at December 31, 2016, the REIT performed its annual goodwill impairment test. Based on the impairment test performed, the REIT concludes that no goodwill impairment existed as at December 31, 2016. (i) Principles of consolidation The consolidated financial statements comprise the financial statements of the REIT and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, which is the date on which the REIT obtains control, and continue to be consolidated until the date that such control ceases. Control exists when the REIT has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefit from its activities. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. (ii) Functional and presentation currency The functional and presentation currency of the REIT is the Canadian dollar. Assets and liabilities of subsidiaries and associates having a functional currency other than the Canadian dollar are translated at the rate of exchange at the consolidated statement of financial position dates. Revaluation gains and losses are recognized in other comprehensive income. Revenue and expenses are translated at average rates for the year. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. At the end of each reporting year, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the prevailing rate of exchange at the consolidated statement of financial position dates. Gains and losses on translation of monetary items are recognized in the consolidated statements of income, except for those related to monetary liabilities qualifying as hedges of the REIT's investment in foreign operations or certain intercompany loans to or from a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future, which are included in other comprehensive income. (iii) Investment properties Investment properties include properties that are held principally by the REIT to earn rentals, for capital appreciation, or both. Investment properties acquired are recognized initially at cost, which includes all costs directly related to the acquisition of the properties such as legal fees, appraisal fees and land transfer taxes. Subsequent to initial recognition, investment properties are measured at fair value, with changes in fair value recognized in the consolidated statements of income and comprehensive income in the years in which they arise. Subsequent capital expenditures are charged to investment property only when it is probable that the future economic benefits of the expenditure will flow to the REIT and the cost can be measured reliably. - 10 -
2. Summary of Significant Accounting Policies (continued) (iv) Assets Held for Sale Investment properties are transferred to assets held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the case, the investment property must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property, and its sale must be highly probable. Management must be committed to a plan to sell the asset and an active effort to locate a buyer and complete the plan must have been initiated. Furthermore, the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value, with the sale expected to be consummated within one year from the date of classification as held for sale. Investment properties classified as assets held for sale are measured at fair value. (v) Intangible assets The intangible assets (note 11) relate to the REIT's rights and obligations that VHML and GHM have under their contracts with Vital Trust and GHC respectively. The intangible asset between VHML and Vital Trust has been measured at its fair value as at the effective date of the Internalization Transaction. The contract between GHM and GHC has also been measured at its fair value as at the date the REIT acquired 100% interest in GHM. As both contracts have an indefinite life and do not expire, the intangible assets are not being amortized. The intangible assets are assessed for impairment annually and whenever there is an indication that an intangible asset may be impaired. (vi) Leases A lease is classified as a finance lease if it results in a transfer of substantially all the risks and rewards incidental to ownership from the REIT to the lessee. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership to the lessee. All of the leases to which the REIT is the lessor have been determined to be operating leases. (vii) Revenue recognition Rental revenue from operating leases is recognized over the lease term on a straight-line basis. The difference between rental revenue recognized and cash flows is recorded as straight-line rent receivable or payable on the consolidated statements of financial position. Rental revenue includes rental income earned from tenants under lease agreements, operating costs and realty tax recoveries, parking income, and incidental income. Operating cost and realty tax recoveries are recognized in the year that recoverable costs are chargeable to tenants. Other income includes management fees earned from the management contract for GHC as described in note 11. The REIT recognizes management fees to the extent those fees are earned from third-party interest in GHC. Deferred revenue comprises amounts received in advance related to income from rents relating to future years. - 11 -
2. Summary of Significant Accounting Policies (continued) (i) Financial Instruments The REIT recognizes financial assets and financial liabilities when the REIT becomes a party to a contract. Financial assets and financial liabilities, with the exception of financial assets and financial liabilities classified as at fair value through profit or loss ("FVTPL"), are measured at fair value plus transaction costs on initial recognition. Financial assets at FVTPL are measured at fair value on initial recognition and transaction costs are expensed when incurred. Measurement in subsequent years depends on the classification of the financial instrument: FVTPL Financial assets are classified as FVTPL when acquired principally for the purpose of trading, if so designated by management, or if they are derivative assets. Financial assets classified as FVTPL are measured at fair value, with changes recognized in the consolidated statements of income (loss) and comprehensive income (loss). The REIT has not designated any assets as FVTPL. Certain derivative financial instruments that are considered to be derivative assets are classified as FVTPL by definition. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the REIT has the ability and the intent to hold until maturity. Held-tomaturity investments are measured at amortized cost using the effective interest method. If there is objective evidence that the investment is impaired, its recoverable amount is determined and any impairment loss is recognized in the consolidated statements of income and comprehensive income. Objective evidence would include a significant or prolonged decline in the fair value of an investment below its original cost. The REIT does not have any held-to-maturity investments. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated as such by management or not classified in any of the other categories. Available-for-sale financial assets are measured at fair value with changes recognized in other comprehensive income. Upon sale or impairment, the accumulated fair value adjustments recognized in other comprehensive income are recorded in the consolidated statements of income and comprehensive income. If there is objective evidence that an asset is impaired, its recoverable amount is determined and any impairment loss is recognized in the consolidated statements of income and comprehensive income. Objective evidence would include a significant or prolonged decline in the fair value of an asset below its original cost. The REIT does not have any available-for-sale financial assets. Loans and receivables Loans and receivables are non-derivative financial assets that have fixed or determinable payments and are not quoted in an active market. Subsequent to initial recognition, loans and receivables are carried at amortized cost using the effective interest method. If there is objective evidence that an asset is impaired, its recoverable amount is determined and any impairment loss is recognized in the consolidated statements of income and comprehensive income. Cash, accounts receivable and the balances due from related parties are classified as loans and receivables. Due to the short-term nature of accounts receivable and due to the fact that the balances due from related parties are due on demand, the carrying amounts of these loans and receivables approximate fair values. - 12 -
2. Summary of Significant Accounting Policies (continued) (i) Financial Instruments (continued) Financial liabilities at FVTPL Financial liabilities are classified as FVTPL if they are designated as such by management, or they are derivative liabilities. Financial liabilities classified as FVTPL are measured at fair value, with changes recognized in the consolidated statements of income and comprehensive income. The REIT has designated the Class B exchangeable units, convertible debentures, and DUP liability as FVTPL. Certain derivative financial instruments are considered to be derivative liabilities, and are classified as FVTPL by definition. Other financial liabilities Other financial liabilities are financial liabilities that are not classified as FVTPL. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The REIT's other financial liabilities include mortgages and loans payable, deferred consideration, accounts payable and accrued liabilities, and distributions payable. The effective interest method is a method of calculating the amortized cost of an instrument and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or disbursements (including all transaction costs and other premiums or discounts) through the expected life of the debt instrument to the net carrying amount on initial recognition. Due to their short-term nature, the carrying value of the deferred consideration, accounts payable and accrued liabilities, income taxes payable, and distributions payable approximates fair value. (j) Other assets Other assets include commodity taxes recoverable, acquisition costs and deposits, and prepaid expenses. Acquisition costs and deposits related to future asset acquisitions are capitalized when it is probable that the acquisition will be completed. (k) DUP liability The DUP units are exchangeable for Trust Units, which in turn are puttable financial instruments and classified as a liability under International Accounting Standard 32, Financial Instruments - Presentation ("IAS 32"). As such, the DUP units are classified as a liability. Management designated the DUP liability as FVTPL; the DUP liability is re-measured to fair value each reporting date with changes recorded in the consolidated statements of income and comprehensive income. (l) Segmented reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. - 13 -
2. Summary of Significant Accounting Policies (continued) (m) Derivative financial instruments The REIT uses derivative financial instruments such as interest rate swaps and forward exchange contracts to manage risks from fluctuations in interest rates and foreign exchange rates. Derivative financial instruments are initially recorded at fair value on the date a derivative contract is entered into and subsequently re-measured at fair value. Gains and losses arising from changes in fair value of a derivative are recognised as they arise in the profit and loss in the statement of comprehensive income unless the derivative is a hedging instrument in a qualifying hedge relationship, in which case the gains and losses are recognised in other comprehensive income. The REIT has entered into interest rate swap contracts to limit its exposure to fluctuations in the interest rates on variable rate loans. These derivative financial instruments are not designated as hedging instruments. Gains or losses arising from the change in fair values of the interest rate swap contracts are recognized in the consolidated statements of income. The REIT entered into a forward contract to purchase an additional GHC units on February 24, 2017 at a. The REIT determined that the forward contract was derivative financial instrument and has not designated it as a hedging instrument. Gains or losses arising from the change in fair values of the forward contact are recognized in the consolidated statements of income. Hedge Accounting The REIT, through its investment in Vital Healthcare Property Trust ("Vital Trust"), has entered into certain hedge relationships for hedges of net investments in foreign operations. Hedge relationships are formally documented at the inception of the hedge and this documentation identifies the hedged item, hedging instrument, risks that are being hedged, strategies for undertaking the hedge, and the way effectiveness will be assessed. In the hedge of a net investment in a foreign operation, the portion of foreign exchange differences arising on the hedging instrument determined to be an effective hedge is recognised directly in other comprehensive income. Any ineffective portion is recognised directly in the profit and loss in the statement of comprehensive income. The REIT, through its investment in Vital Trust, uses derivative financial instruments and non-derivative financial instruments as hedging instruments of a net investment in a foreign operation. On disposal of the foreign operation, the cumulative value of such gains or losses recognised in other comprehensive income is reclassified to profit and loss in the statement of comprehensive income. (n) Class B Exchangeable Units The Class B exchangeable units of a subsidiary of the REIT are exchangeable into trust units at the option of the holder. The trust units of the REIT are puttable financial instruments (note 2(o)). The Class B exchangeable units therefore are classified as financial liabilities and have been elected to be measured at fair value through profit and loss each reporting period with any changes in fair value recognized in the consolidated statements of income and comprehensive income as finance costs. The distributions paid on the Class B exchangeable units are accounted for as finance costs. (o) Trust units The trust units meet the definition of a financial liability in accordance with IAS 32, as they are redeemable at the option of the holder. The trust units are considered to be puttable instruments because of the redemption feature of the trust units. There is a limited exemption to allow puttable instruments to be presented as equity provided certain criteria are met. The trust units meet the criteria for this exemption, and accordingly are presented as equity in the consolidated financial statements. Trust units are recognized at the proceeds received, net of direct issue costs. The distributions on trust units are recorded as a reduction in unitholders' equity in the consolidated financial statements. Trust units are recognized at the proceeds received, net of direct issue costs. The distributions on trust units are recorded as a reduction in unitholders' equity. - 14 -
2. Summary of Significant Accounting Policies (continued) (p) Income taxes The REIT is a mutual fund trust and a real estate investment trust pursuant to the Income Tax Act (Canada). Under current tax legislation, a real estate investment trust is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to unitholders of the REIT ("Unitholders") each year. The REIT is a real estate investment trust if it meets the prescribed conditions under the Income Tax Act (Canada) relating to the nature of its assets and revenues (the "REIT Conditions"). The REIT has reviewed the REIT Conditions and has assessed their interpretation and application to the REIT's assets and revenue. The REIT intends to ensure that it will meet the REIT conditions and will make distributions not less than the amount necessary to ensure that the REIT will not be liable to pay income taxes. The REIT's subsidiaries are subject to income taxes as imposed by the jurisdictions in which they operate, in accordance with the relevant tax laws of such jurisdictions. The provision for income taxes for the year comprises current and deferred income tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates and laws enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for: temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profits; and taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. - 15 -
2. Summary of Significant Accounting Policies (continued) (q) Investment in associates Associates are all entities over which the REIT has significant influence but not control. The REIT's share of its associates' post acquisition net income (loss) is recognized in net income (loss), and its share of postacquisition movements in other comprehensive income (loss) is recognized in other comprehensive income (loss). The cumulative post acquisition movements are adjusted against the carrying amount of the investments. When the REIT's share of losses in associates equals or exceeds its interest in the associates, the REIT does not recognize further losses. Unrealized gains and losses on transactions between the REIT and its associates are eliminated to the extent of the REIT's interest in the associates. Accounting policies of the REIT's associates are consistent with the policies adopted by the REIT. The REIT's investment in associates includes the REIT's 19.8% interest in GHC. The REIT has determined it has significant influence, but not control, over the investment based on the presence of qualitative and quantitative indicators under IAS 28-Investments in associates and joint ventures. The REIT considered the following in making its assessment: i) the REIT holds an approximately 20% interest in GHC but does not have representation on the board of APN Funds Management Limited ( APN ), the Responsible Entity which acts as the board of directors of GHC ; ii) through its 100% control of GHM, the external asset manager for GHC, the REIT manages the day to day operations of GHC and has the ability to influence decisions, made by the Responsible Entity, surrounding material transactions; iii) the existence of material transactions between the REIT and GHC, including fees earned by GHM for providing GHC with operations management, investment management and administrative services. The REIT has accordingly accounted for its investments using the equity method of accounting. The investment in GHC has been initially recognized at cost on the date at which significant influence was obtained (see note 10). Prior to the Internalization Transaction and Combination Transaction, the REIT's investment in associates represented the REIT's approximate 24% indirect interest in Vital Trust and an approximate 26% interest in NorthWest Healthcare Properties REIT ("NWHP REIT"). The REIT had determined that due to its approximately 24% interest in Vital Trust (and through the REIT's common external management arrangements with Vital Trust) and 26% interest in NWHP REIT, the REIT had significant influence over the investments and accordingly has accounted for its investments using the equity method of accounting. The investments in Vital Trust and NWHP REIT had been initially recognized at cost on the date at which significant influence was obtained. (r) Convertible Debentures The convertible debentures are convertible into trust units of the REIT. As the REIT's trust units are redeemable at the option of the holder and are therefore considered puttable instruments in accordance with IAS 32, the convertible debentures are considered a liability containing liability-classified embedded derivatives. The REIT has elected to classify and measure its convertible debentures as financial liabilities measured at FVTPL with the changes in fair value being recognized in the consolidated statements of income (loss) and comprehensive income (loss). (s) Future accounting changes (i) IFRS 9, Financial Instruments ("IFRS 9") In July 2014, the IASB issued IFRS 9, Financial Instruments ("IFRS 9") replacing IAS 39, Financial Instruments - Recognition and Measurement. IFRS 9 introduces new requirements for the classification and measurement of financial assets. Under IFRS 9, financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new expected credit loss model for calculating impairment. The standard becomes effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively. Early adoption is permitted. The extent of the impact of adoption of the standard has not yet been determined. - 16 -